Saga (SAGA) and AA (AA.) were among insurance providers whose shares were hit by a Financial Conduct Authority (FCA) interim report on the pricing of home and motor insurance, which could see so-called ‘loyalty penalties’ banned.
Earlier this month, the FCA laid out a range of potential remedies with the aim of allaying concerns over insurance pricing. The study followed a ‘super-complaint’ against broader structural price discrimination from consumer charity Citizens Advice, which was submitted to the Competition and Markets Authority (CMA) in September 2018.
In its complaint, the charity estimated that loyal customers were being overcharged in five key consumer markets, including home insurance, by an average of nearly £900 a year. “This is, in effect, a systematic scam,” it said at the time.
The CMA subsequently recommended that the FCA investigate means to tackle ‘price walking’, a so-called practice that allows insurers to lift prices for consumers that renew with them year on year, and to examine other harmful home insurance business schemes.
Analysts suggested that more interventionist policies could actually benefit insurers. A limit on price-walking could improve insurers’ ‘back-books’ (renewal customers) by reducing incentives to switch provider, thus increasing retention rates, generating more sustainable revenue streams and lowering the costs of customer acquisition.
But it was observed that the interim transition period could prove painful for some insurers, while first-year consumers may also be hit by price rises.
Price-walking could be banned
The FCA is now considering a raft of proposals to protect consumers. These include prohibiting or limiting insurers’ abilities to increase prices for customers who renew year on year. The watchdog could also demand that companies automatically move clients to cheaper equivalent deals. “This market is not working well for all consumers,” said Christopher Woolard, the watchdog’s executive director of strategy and competition. “While a large number of people shop around, many loyal customers are not getting a good deal.”
The FCA believes that around 6m consumers are affected. Citizens Advice chief executive Gillian Guy welcomed the watchdog’s efforts. “We’re especially happy to hear the regulator say that everything is on the table to make sure customers are getting a fair deal,” she said.
“At the moment these are just proposals,” she added. “The FCA must now follow through on these bold ideas to stop loyal insurance customers being penalised.”
Insurers’ shares fell on 4 October, the day that the study was published. Saga dropped by as much as 8 per cent before recovering, while AA closed 3 per cent down on its opening price. Direct Line (DLG), Aviva (AV.) and Hastings (HSTG) were also among those knocked in early trading.
Price comparison website MoneySupermarket.com (MONY) closed 3 per cent up on its opening price.
Saga rumbles on
The FCA believes that if customers who pay high insurance premiums paid the average premium for their risk, they could save around £1.2bn in total every year.
JPMorgan analysts argued that companies with more loyal customers are most likely to be benefiting from overpaying customers, highlighting home insurance providers as particular beneficiaries. “This suggests a risk for Direct Line and Saga in our view,” they wrote, “although we note that both companies have been taking actions to reduce this effect in recent years”.
In April, Saga announced the launch of three-year fixed-price home and motor insurance products, which guarantee consumers the same premium for three years providing there are no claims in the period. A Saga spokesperson said: “We welcome the FCA’s aim of ensuring fair pricing for customers – a goal that we share.”
For several years, Direct Line has reviewed its customers’ renewal prices when they enter their fifth year with the company, and it says many customers have seen premiums frozen or discounted as a result. “We care about our loyal customers and prices shouldn’t keep rising for no reason,” chief executive Penny James said. “And we agree with many of the possible remedies set out… by the FCA.”
AA could be hamstrung
Barclays analysts, meanwhile, observed that the watchdog’s proposals coincide with the AA seeking to enlarge its motor book and boost profitability through customer retention and higher renewal prices. “The potential remedies, proposed by the FCA, could make achieving these goals more difficult, and also challenge the profitability of the existing back-book of policies in the short term,” they wrote.
“Higher profits are currently made from the back-book,” they added, “which is the case in motor/home insurance as well as roadside assistance policies.” Barclays commented that AA is already limiting its renewal pricing in its older roadside policies to around inflation levels. AA declined to comment.
